What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-31 compared with 2020-03-31 · 270 added, 386 removed, 646 unchanged (50% of the section changed)

16 unchanged sentences

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of January 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date.

The material weaknesses related to the following as the WageWorks subsidiary:

(i) did not have an effective risk assessment as it did not sufficiently identify and analyze risks arising from changes in the business environment, including risks arising in connection with the integration of acquisitions and financial system implementations, (ii) did not have effective information and communication as it did not establish cross-functional procedures and policies necessary to support the functioning of internal control over financial reporting, and (iii) did not have effective monitoring as it did not implement effective monitoring controls that were responsive to changes in the business or the timely remediation of identified control deficiencies.

The material weaknesses in risk assessment, information and communication and monitoring at the WageWorks subsidiary contributed to additional material weaknesses as the WageWorks subsidiary:

(a) had inadequate process level and monitoring controls in the area of accounting close and financial reporting specifically, but not exclusively, around the review of account reconciliations, completeness and accuracy of data material to financial reporting, accounting estimates and related cut-off, the establishment, review, and implementation of accounting policies, and the review of the accuracy and completeness of certain manual and complex data feeds into journal entries and reconciliations of high-volume standard transactions, (b) did not have effective controls around the contract-to-cash life cycle of service fees, including ineffective process level controls around billing set-up during customer implementation, managing change to existing customer billing terms and conditions, timely termination of customers, implementing complex and/or non-standard billing arrangements that require manual intervention or manual controls for billing to customers, processing timely adjustments, lack of robust, established and documented policies to assess collectability and reserve for revenue, bad debts and accounts receivable, availability of customer contracts, and reviews of non-standard contracts, and (c) did not have effective controls related to information technology general controls (ITGCs) in the areas of logical access and change-management over certain information technology systems that supported its financial reporting processes.

WageWorks' business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses referred to above are described in Management’s report on internal control over financial reporting appearing under Item 9A.

We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Change in Accounting Principle

1 unchanged sentence

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s report on internal control over financial reporting appearing under Item 9A.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.

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We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s report on internal control over financial reporting, management has excluded WageWorks, Inc.

from its assessment of internal control over financial reporting as of January 31, 2020, because it was acquired by the Company in a purchase business combination during the year ended January 31, 2020.

We have also excluded WageWorks, Inc.

from our audit of internal control over financial reporting.

WageWorks, Inc.

is a wholly-owned subsidiary whose total assets, excluding the effects of purchase accounting, and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 11% and 35%, respectively, of the related consolidated financial statement amounts as of and for the year ended January 31, 2020.

Definition and Limitations of Internal Control over Financial Reporting

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Intangible Assets Acquired in the WageWorks, Inc.

As described in Note 3 to the consolidated financial statements, on August 30, 2019, the Company closed the acquisition of WageWorks, Inc.

for $51.35 per share in cash, or approximately $2.0 billion to WageWorks, Inc.

stockholders.

The acquisition resulted in $1.3 billion of goodwill and $711.5 million of intangible assets being recorded.

The intangible assets were comprised of customer relationships of $598.5 million, developed technology of $96.9 million, trade names and trademarks of $12.3 million and in-process software development costs of $3.8 million.

The Company preliminarily valued the acquired assets utilizing the discounted cash flow method, a form of the income approach.

The significant assumptions used in the discounted cash flow analyses include future revenue growth and attrition rates, projected margins, royalty rates, technological obsolescence, discount rates used to present value future cash flows, and the amount of revenue and cost synergies expected from the acquisition.

The principal considerations for our determination that performing procedures relating to the valuation of intangible assets acquired in the acquisition of WageWorks, Inc.

is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the customer relationships, developed technology, and trade names and trademarks intangible assets acquired due to the significant judgment required by management when developing the estimate;

(ii) significant audit effort was required in evaluating the significant assumptions relating to the valuation of the aforementioned intangible assets, which included the future revenue growth and discount rates for all the aforementioned intangible assets, royalty rates for the developed technology and trade names and trademarks intangible assets, attrition rates for the customer relationships intangible asset, and technological obsolescence for the developed technology intangible asset;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of intangible assets and controls over development of significant assumptions related to the valuation of intangible assets, including future revenue growth and attrition rates, royalty rates, technological obsolescence, and discount rates.

These procedures also included, among others, (i) reading the purchase agreement;

(ii) testing management’s process for estimating the fair value of intangible assets;

and (iii) evaluating the appropriateness of the discounted cash flow methods, testing the completeness and accuracy of the underlying data, and evaluating the reasonableness of significant assumptions, including the future revenue growth and attrition rates, royalty rates, technological obsolescence, and discount rates.

Evaluating the reasonableness of the future revenue growth and attrition rates, technological obsolescence, and attrition rates involved considering the past performance of the acquired business,

as well as economic and industry forecasts.

The discount rates were evaluated by considering the cost of capital of comparable businesses and other industry factors.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the methods and certain significant management assumptions, including technology obsolescence, royalty rates, and discount rates.

Determination of the Useful Life of Acquired Customer Relationships in the WageWorks, Inc.

As described in Notes 1 and 3 to the consolidated financial statements, on August 30, 2019, the Company closed the acquisition of WageWorks, Inc.

for $51.35 per share in cash, or approximately $2.0 billion to WageWorks, Inc.

stockholders.

As part of the transaction, the Company recorded a customer relationships intangible asset of $598.5 million.

The useful life of the acquired customer relationships intangible asset was estimated based on future revenue growth and attrition.

The principal considerations for our determination that performing procedures relating to the determination of the useful life of the acquired customer relationships intangible asset in the WageWorks, Inc.

acquisition is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the useful life estimate due to the significant judgment required by management when developing the estimate;

and (ii) significant audit effort was required in evaluating the significant assumptions relating to the useful life estimate, which included the future revenue growth and attrition.

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

WageWorks, Inc.

Service Revenue Recognition

As described in Note 1 to the consolidated financial statements, the Company's primary sources of revenue are service, custodial, and interchange revenue.

The Company’s service revenue was $431 million for the year ended January 31, 2021, of which a significant portion relates to WageWorks, Inc.

To generate service revenue, the Company hosts its platforms, prepares statements, provides a mechanism for spending funds, and provides customer support services.

All of these services are consumed as they are received.

The Company recognizes service revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for those services, on a monthly basis as it satisfies its performance obligations.

The principal consideration for our determination that performing procedures relating to WageWorks, Inc.

service revenue recognition is a critical audit matter is a high degree of auditor effort in performing procedures related to revenue recognition in consideration of the material weaknesses identified by the Company in WageWorks, Inc.’s internal control environment relating to risk assessment, information and communication, and monitoring as described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section above.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the determination of the useful life of the acquired customer relationships, including controls over the development of significant assumptions relating to the useful life estimate, including future revenue growth and attrition.

These procedures also included, among others (i) testing management’s process for developing the estimate of the useful life of acquired customer relationships;

(ii) testing the completeness, accuracy, and relevance of underlying data used in the estimate;

and (iii) evaluating the significant assumptions used by management, including the future revenue growth and attrition.

Evaluating the reasonableness of the future revenue growth and attrition involved considering the past performance of the acquired business, as well as economic and industry forecasts, and the consistency with other evidence obtained throughout the audit.

These procedures included, among others, evaluating the recognition of service revenue for a sample of revenue transactions by obtaining confirmation from customers or obtaining and inspecting source documents, including invoices, sales contracts, and cash receipts.

/s/ PricewaterhouseCoopers LLP

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Interest expense ( 34,881 ) ( 24,772 ) ( 270 )

Other expense, net ( 9,079 ) ( 1,582 ) ( 1,955 )

Other income (expense), net 5,007 ( 9,079 ) ( 1,582 )

Total other expense ( 29,874 ) ( 33,851 ) ( 1,852 )

Income before income taxes 4,140 43,155 75,818

Income tax provision 3,491 1,919 4,827

Net income $ 39,664 $ 73,899 $ 47,362

Income tax provision (benefit) ( 4,694 ) 3,491 1,919

Net income and comprehensive income $ 8,834 $ 39,664 $ 73,899

Net income per share:

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Diluted 75,679 68,453 63,370

Comprehensive income:

Net income $ 39,664 $ 73,899 $ 47,362

Other comprehensive loss:

Unrealized loss on available-for-sale marketable securities, net of tax — — ( 59 )

Comprehensive income $ 39,664 $ 73,899 $ 47,303

The accompanying notes are an integral part of the consolidated financial statements.

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Issuance of common stock:

Issuance of common stock upon exercise of options and for restricted stock units 1,287 — 14,564 — — 14,564

Issuance of common stock upon exercise of options, and for restricted stock 1,621 — 22,929 — — 22,929

Stock-based compensation — — 21,057 — — 21,057

Cumulative effect from adoption of ASC 606 — — — — 13,007 13,007

Cumulative effect from adoption of ASU 2016-01 — — — 269 ( 356 ) ( 87 )

Adoption of ASU 2018-02 — — — ( 45 ) 45 —

Other comprehensive loss, net of tax — — — ( 59 ) — ( 59 )

Net income — — — — 73,899 73,899

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Issuance of common stock:

Issuance of common stock upon exercise of options and for restricted stock units 1,621 — 22,929 — — 22,929

Issuance of common stock upon exercise of options, and for restricted stock 842 — 11,438 — — 11,438

Other issuance of common stock 7,763 1 462,269 — — 462,270

Stock-based compensation — — 39,844 — — 39,844

Cumulative effect from adoption of ASC 606 — — — — 13,007 13,007

Cumulative effect from adoption of ASU 2016-01 — — — 269 ( 356 ) ( 87 )

Net income — — — — 39,664 39,664

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Issuance of common stock:

Issuance of common stock upon exercise of options and for restricted stock units 842 — 11,438 — — 11,438

Issuance of common stock upon exercise of options, and for restricted stock 827 — 9,956 — — 9,956

Other issuance of common stock 5,290 1 286,779 — — 286,780

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Stock-based compensation 42,863 39,844 21,057

(Gains) losses on marketable equity securities and other ( 23,151 ) 1,173 597

Amortization of debt issuance costs 5,102 2,711 60

(Gains) losses on marketable equity securities — ( 27,570 ) 103

Other non-cash items 1,753 728 676

Deferred taxes ( 5,132 ) 3,665 408

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Operating lease right-of-use assets 11,150 6,218 —

Accounts payable ( 3,839 ) 863 ( 581 )

Accrued compensation 771 4,550 4,432

Accrued liabilities and other current liabilities 5,759 3,031 484

Accounts payable, accrued liabilities, and other current liabilities 30,422 1,920 3,894

Operating lease liabilities, non-current ( 10,803 ) ( 5,383 ) —

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Cash flows from investing activities:

Acquisitions, net of cash acquired ( 1,644,575 ) — ( 2,882 )

Purchases of marketable securities ( 53,845 ) ( 728 ) ( 483 )

Purchases of property and equipment ( 13,093 ) ( 7,286 ) ( 3,869 )

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Acquisition of intangible member assets ( 32,371 ) ( 9,134 ) ( 1,195 )

Acquisitions, net of cash acquired — ( 1,644,575 ) —

Purchases of marketable securities — ( 53,845 ) ( 728 )

Proceeds from sale of marketable securities — — 41,422

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Cash flows from financing activities:

Proceeds from follow-on equity offering, net of payments for offering costs 286,779 458,495 —

Principal payments on long-term debt ( 239,063 ) ( 7,813 ) —

Proceeds from long-term debt — 1,250,000 —

Payment of debt issuance costs — ( 30,504 ) —

Principal payments on long-term debt ( 7,813 ) — —

Settlement of client-held funds obligation ( 3,862 ) ( 215,790 ) —

Proceeds from follow-on offering, net of payments for offering costs 458,495 — —

Proceeds from exercise of common stock options 8,568 11,347 22,929

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Interest expense paid in cash $ 27,686 $ 21,806 $ 203

Income taxes paid in cash, net of refunds received 9,277 587 27

Income tax payments (refunds), net ( 6,022 ) 9,277 587

Supplemental disclosures of non-cash investing and financing activities:

Acquisition of intangible member assets accrued at period end — — 1,409

Purchases of property and equipment included in accounts payable or accrued liabilities 160 487 37

Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation 1,930 1,742 200

Decrease in goodwill due to measurement period adjustments, net 5,438 — —

Exercise of common stock options receivable 1,478 — —

Equity-based acquisition consideration — 3,776 —

Purchases of property and equipment included in accounts payable or accrued liabilities at period end 487 37 —

Purchases of software and capitalized software development costs included in accounts payable or accrued liabilities at period end 1,742 200 3

The accompanying notes are an integral part of the consolidated financial statements.

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HealthEquity, Inc.

was incorporated in the state of Delaware on September 18, 2002.

HealthEquity, Inc.

is a leader in administering health savings accounts (“HSAs”) and complementary consumer-directed benefits (“CDBs”), which empower consumers to access tax-advantaged healthcare savings while also providing corporate tax advantages for employers.

In February 2006, HealthEquity, Inc.

received designation by the U.S.

Department of Treasury to act as a passive non-bank custodian, which allows HealthEquity, Inc.

to hold custodial assets for individual account holders.

On July 24, 2017, HealthEquity, Inc.

received designation by the U.S.

Department of Treasury to act as both a passive and non-passive non-bank custodian, which allows HealthEquity, Inc.

to hold custodial assets for individual account holders and use discretion to direct investment of such assets held.

As a passive and non-passive non-bank custodian according to Treasury Regulations section 1.408-2(e)(5)(ii)(B), the Company must maintain net worth (assets minus liabilities) greater than the sum of 2 % of passive custodial funds held at each calendar year-end and 4 % of the non-passive custodial funds held at each calendar year-end in order to take on additional custodial assets.

("HealthEquity" or the "Company") was incorporated in the state of Delaware on September 18, 2002.

HealthEquity is a leader in administering health savings accounts (“HSAs”) and complementary consumer-directed benefits (“CDBs”), which empower consumers to access tax-advantaged healthcare savings while also providing corporate tax advantages for employers.

In February 2006, HealthEquity received designation by the U.S.

Department of Treasury to act as a passive non-bank custodian, which allows HealthEquity to hold custodial assets for individual account holders.

On July 24, 2017, HealthEquity received designation by the U.S.

Department of Treasury to act as both a passive and non-passive non-bank custodian, which allows HealthEquity to hold custodial assets for individual account holders and use discretion to direct investment of such assets held.

As a passive and non-passive non-bank custodian according to Treasury Regulations section 1.408-2(e)(5)(ii)(B), the Company must maintain net worth (assets minus liabilities) greater than the sum of 2 % of passive custodial funds held at each fiscal year-end and 4 % of the non-passive custodial funds held at each fiscal year-end in order to take on additional custodial assets.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP.

The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity.

These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the consolidated financial statements, except for the new accounting pronouncements adopted during the year ended January 31, 2020, as described below.

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

Acquisition of WageWorks, Inc.

On August 30, 2019, HealthEquity, Inc.

closed the acquisition of WageWorks, Inc.

(“WageWorks”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), for $ 51.35 per share in cash, or approximately $ 2.0 billion to WageWorks stockholders (the “Acquisition”).

As a result of the Acquisition, HealthEquity, Inc.

gained access to more of the HSA market by expanding its direct distribution to employers and benefits advisors as a single source provider of HSAs and other CDBs, including flexible spending accounts, health reimbursement arrangements, COBRA administration, commuter and other benefits.

On August 30, 2019, HealthEquity closed the acquisition of WageWorks, Inc.

(the “WageWorks Acquisition”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), for $ 51.35 per share in cash, or approximately $ 2.0 billion to WageWorks stockholders.

As a result of the WageWorks Acquisition, HealthEquity gained access to more of the HSA market by expanding its direct distribution to employers and benefits advisors as a single source provider of HSAs and other CDBs, including flexible spending accounts, health reimbursement arrangements, Consolidated Omnibus Budget Reconciliation Act ("COBRA") administration, commuter and other benefits.

Follow-on equity offering

In July 2020, the Company closed a follow-on public offering of 5,290,000 shares of common stock at a public offering price of $ 56.00 per share, less the underwriters' discount.

The Company received net proceeds of $ 286.8 million after deducting underwriting discounts and commissions of $ 8.9 million and other offering expenses of $ 0.6 million.

The Company used $ 200.0 million of such proceeds to repay debt under its term loan facility.

Principles of consolidation

The consolidated financial statements include the accounts of HealthEquity, Inc., and its direct and indirect subsidiaries.

The consolidated financial statements include the accounts of HealthEquity and its direct and indirect subsidiaries.

All significant intercompany accounts and transactions have been eliminated in consolidation.

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Many of the Company's client services agreements with employers (referred to as "Clients") provide that Clients remit funds to the Company to pre-fund Client and employee participant contributions related to flexible spending accounts and health reimbursement arrangements (“FSAs” and “HRAs”, respectively) and commuter accounts.

These Client-held funds remitted to the Company do not represent cash assets of the Company to the extent that

they are not combined with corporate cash, and accordingly are not included in cash and cash equivalents on the Company's consolidated balance sheets.

Prior to the closing of the Acquisition, Wageworks included all Client-held funds with its corporate cash assets on its balance sheet, with an offsetting Client-held funds obligation.

As of the closing of the Acquisition on August 30, 2019, WageWorks held approximately $ 682 million of Client-held funds, of which $ 220 million was combined with its corporate cash within WageWorks' corporate bank accounts;

therefore, the Company determined that this $ 220 million of Client-held funds were assets of the Company, while the approximately $ 462 million of remaining Client-held funds were not assets of the Company.

As of January 31, 2020, $ 4 million of Client-held funds remained combined within the Company's corporate bank accounts and therefore remained on the Company's consolidated balance sheets in cash and cash equivalents, with an offsetting liability included in accrued liabilities.

These Client-held funds remitted to the Company do not represent cash assets of the Company to the extent that they are not combined with corporate cash, and accordingly are not included in cash and cash equivalents on the Company's consolidated balance sheets.

Accounts receivable

On February 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments using the modified retrospective transition method.

Accounts receivable represent monies due to the Company for monthly service revenue, custodial revenue and interchange revenue.

The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivable amounts.

In evaluating the Company’s ability to collect outstanding receivable balances, the Company considers various factors including the age of the balance, the creditworthiness of the customer, which is assessed based on ongoing credit evaluations and payment history, and the customer’s current financial condition.

As of January 31, 2020 and 2019, the Company had allowance for doubtful accounts of $ 1.2 million and $ 0.1 million, respectively.

During the years ended January 31, 2020 and 2019, the Company recorded credit losses from trade receivables of $ 1.0 million and $ 0.2 million, respectively.

The Company maintains an allowance for doubtful accounts to reserve for expected credit losses from trade receivables considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions.

In evaluating the Company’s ability to collect outstanding receivable balances, the Company considers various factors including macroeconomic variables, the age of the balance, the creditworthiness of the customer, which is assessed based on ongoing credit evaluations and payment history, and the customer’s current financial condition.

Marketable equity securities are strategic equity investments with readily determinable fair values for which the Company does not have the ability to exercise significant influence.

These securities are accounted for at fair value and were classified as investments on the consolidated balance sheets.

All gains and losses on these investments, realized and unrealized, are recognized in other expense, net in the consolidated statements of operations and comprehensive income.

As a result of the Acquisition on August 30, 2019, the Company's marketable equity security investment in WageWorks was canceled.

All gains and losses on these investments, realized and unrealized, are recognized in other income (expense), net in the consolidated statements of operations and comprehensive income.

Non-marketable equity securities are strategic equity investments without readily determinable fair values for which the Company does not have the ability to exercise significant influence.

These securities are accounted for using the measurement alternative and are classified as other assets on the consolidated balance sheets.

All gains and losses on these investments, realized and unrealized, are recognized in other expense, net on the consolidated statements of operations and comprehensive income.

All gains and losses on these investments, realized and unrealized, are recognized in other income (expense), net on the consolidated statements of operations and comprehensive income.

Equity method investments are equity securities in investees the Company does not control but over which the Company has the ability to exercise significant influence.

Equity method investments are included in other assets on the consolidated balance sheets.

The Company's share of the earnings or losses as reported by equity method investees, amortization of basis differences, and related gains or losses, if any, are recognized in other expense, net on the consolidated statements of operations and comprehensive income.

The Company's share of the earnings or losses as reported by equity method investees, amortization of basis differences, and related gains or losses, if any, are recognized in other income (expense), net on the consolidated statements of operations and comprehensive income.

The Company assesses whether an other-than-temporary impairment loss on equity method investments and an impairment loss on non-marketable equity securities has occurred due to declines in fair value or other market conditions.

If any impairment is considered other than temporary for equity method investments or impairment is identified for non-marketable equity securities, the Company will write down the investment to its fair value and record the corresponding charge through other expense, net in the consolidated statements of operations and comprehensive income.

If any impairment is considered other than temporary for equity method investments or impairment is identified for non-marketable equity securities, the Company will write down the investment to its fair value and record the corresponding charge through other income (expense), net in the consolidated statements of operations and comprehensive income.

Other assets consist primarily of contract costs, debt issuance costs, prepaid expenditures, income tax receivables, inventories, and various other assets.

Amounts expected to be recouped or recognized over a period of twelve months or less have been classified as current in the accompanying consolidated balance sheets.

The Company adopted ASU 2016-02, Leases (codified as "ASC 842") on February 1, 2019 using the modified retrospective transition method with the adoption date as the date of initial application.

Consequently, prior period balances and disclosures have not been restated.

The Company determines if a contract contains a lease at inception or any modification of the contract.

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As the rate implicit in each lease is not readily determinable, management uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.

The Company used its incremental borrowing rate on February 1, 2019 for all leases that commenced prior to that date.

Operating leases are included in operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, non-current on the consolidated balance sheets beginning February 1, 2019.

Property and equipment

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Acquired HSA portfolios 15 years

We account for the costs of computer software developed or obtained for internal use in accordance with Accounting Standards Codification (“ASC”) 350-40, “Internal-Use Software.” Costs incurred during operation and post-implementation stages are charged to expense.

We account for the costs of computer software developed or obtained for internal use in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software .

Costs incurred during operation and post-implementation stages are charged to expense.

Costs incurred during the application development stage that are directly attributable to developing or obtaining software for internal use are capitalized.

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The Company reviews identifiable amortizable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.

Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows

resulting from use of the asset and its eventual disposition.

Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition.

Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value.

During the year ended January 31, 2019, the Company incurred a loss on disposal of approximately $ 0.7 million of previously capitalized software development costs.

No impairment charges were recorded during the years ended January 31, 2020 or 2018.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination.

4 unchanged sentences

If the carrying value of the reporting unit exceeds its fair value, an impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value.

The Company’s annual goodwill impairment test resulted in no impairment charges in any of the periods presented in the accompanying consolidated financial statements.

Self-insurance

10 unchanged sentences

• allocation of the transaction price to the performance obligations in the contract;

• recognition of revenue when, or as, we satisfy a performance obligation.

• recognition of revenue when, or as, the Company satisfies a performance obligation.

Disaggregation of revenue.

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Costs to obtain a contract.

ASC 606 requires capitalizing the costs of obtaining a contract when those costs are expected to be recovered.

As of January 31, 2020, the net amount capitalized as contract costs was $ 21.8 million, which is included in other current assets and other assets.

Amortization of capitalized contract costs during the year ended January 31, 2020 was $ 1.9 million.

ASC 606, Revenue from contracts with customers , requires capitalizing the costs of obtaining a contract when those costs are expected to be recovered.

In order to determine the amortization period for sales commissions contract costs, the Company applied the portfolio approach.

Accordingly, the amortization period of the assets has been determined to be the average economic life of an HSA or CDB relationship, which is estimated to be 15 years and 7 years, respectively.

Accordingly, the amortization period of the assets has been determined to be the average economic life of an HSA or other CDB relationship, which is estimated to be 15 years and 7 years, respectively.

Amortization of capitalized sales commission contract costs is included in sales and marketing expenses in the consolidated statements of operations and comprehensive income.

The Company has applied the practical expedient which allows an entity to account for incremental costs of obtaining a contract at a portfolio level.

The Company has also applied the practical expedient to recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less.

Performance obligations.

ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations;

however, as permitted by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable

consideration that meets specified criteria.

Amounts excluded are not significant to the Company's consolidated statements of operations and comprehensive income.

however, as permitted by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria.

Service revenue.

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All of these services are consumed as they are received.

The Company will continue to recognize service revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for those services, on a monthly basis as it satisfies its performance obligations.

Custodial revenue.

The Company deposits HSA assets at federally insured custodial depository partners, which we refer to as our Depository Partners, and investment assets with an investment partner.

The Company deposits HSA assets and Client-held funds at federally insured custodial depository partners, which we refer to as our Depository Partners, and investment assets with an investment

The deposit of funds represents a service that is simultaneously received and consumed by our Depository Partners and investment partner.

The Company will continue to recognize custodial revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for the service, each month based on the amount received by its custodial partners and investment partners.

The Company recognizes custodial revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for the service, each month based on the amount received by its custodial partners and investment partners.

Interchange revenue.

The Company satisfies its interchange performance obligation each time payments are made with its cards via payment networks.

The Company will continue to recognize interchange revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for the service, in the month the payment transaction occurs.

The Company recognizes interchange revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for the service, in the month the payment transaction occurs.

Contract balances.

The Company does not recognize revenue in advance of invoicing its customers and therefore has no related contract assets.

The Company does not recognize revenue until its right to consideration is unconditional and therefore has no related contract assets.

The Company records a receivable when revenue is recognized prior to payment and the Company has unconditional right to payment.

Alternatively, when payment precedes the related services, the Company records a contract liability, or deferred revenue, until its performance obligations are satisfied.

The Company's deferred revenue increased from $ 0.4 million as of January 31, 2019 to $ 3.7 million as of January 31, 2020, primarily due to the Acquisition.

The balances are related to cash received in advance for a certain interchange revenue arrangement, other up-front fees and other commuter deferred revenue, and are generally recognized within twelve months , with the exception of the interchange arrangement, which is generally recognized over a five year term.

Revenue recognized during the fiscal year that was included in the beginning balance of deferred revenue was $ 0.4 million.

The Company expects to satisfy its remaining obligations for these arrangements.

Significant judgments.

The Company makes no significant judgments in determining the amount or timing of revenue recognition.

The Company has estimated the average economic life of an HSA or CDB member relationship, which which has been determined to be the amortization period for the capitalized sales commissions contract costs.

Practical expedients.

The Company has applied the practical expedient which allows an entity to account for incremental costs of obtaining a contract at a portfolio level.

The Company has also applied the practical expedient to recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less.

The Company has estimated the average economic life of an HSA or CDB member relationship, which has been determined to be the amortization period for the capitalized sales commissions contract costs.

Cost of revenue

The Company incurs cost of revenue related to servicing member accounts, managing customer and partner relationships, and processing reimbursement claims.

Expenditures include personnel-related costs, depreciation, amortization, stock-based compensation, common expense allocations, new member and participant supplies and other operating costs of the Company’s related member account servicing departments.

Other components of the Company’s cost of revenue sold include interest retained by members on custodial assets held and interchange costs incurred in connection with processing card transactions initiated by members.

Expenditures include personnel-related costs, depreciation, amortization, stock-based compensation, common expense allocations, new member and participant supplies, and other operating costs of the member account servicing departments.

Other components of the Company’s cost of revenue include interest retained by members on custodial assets held and interchange costs incurred in connection with processing card transactions initiated by members.

Stock-based compensation

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The fair value of RSUs and RSAs is based on the current value of the Company's closing stock price on the date of grant less the present value of future expected dividends discounted at the risk-free interest rate.

At the closing of the Acquisition, and in accordance with the Merger Agreement, certain service-based RSUs with respect to WageWorks common stock were replaced by the Company and converted into RSUs with respect to common stock of the Company.

Certain other WageWorks equity awards were exchanged for cash.

The fair value of awards that were replaced or exchanged for cash was measured as of the Acquisition date, and a portion of the fair value, which represented the pre-Acquisition service provided by team members to WageWorks, was included in the total consideration paid as part of the Acquisition.

The remaining fair value represents post-Acquisition share-based compensation expense.

For stock-based awards with performance conditions, the Company evaluates the probability of achieving the performance criteria and of the number of shares that are expected to vest, and compensation expense is then adjusted to reflect the number of shares expected to vest and the requisite service period.

For awards with performance conditions, compensation expense is recognized using the graded-vesting attribution method in accordance with the provisions of FASB ASC Topic 718, Compensation—Stock Compensation ("Topic 718") .

For awards with performance conditions, compensation expense is recognized using the graded-vesting attribution method in accordance with the provisions of ASC 718, Compensation—Stock Compensation ("Topic 718").

Compensation expense related to stock-based awards with market conditions is recorded on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied.

Upon the exercise of a stock option or release of an RSU/RSA, common shares are issued from authorized, but not outstanding, common stock.

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Interest expense consists of accrued interest expense and amortization of deferred financing costs associated with our credit agreement.

Income tax provision

The Company accounts for income taxes and the related accounts under the liability method as set forth in the authoritative guidance for accounting for income taxes.

Income tax provision (benefit)

The Company accounts for income taxes and the related accounts under the asset and liability method as set forth in ASC 740, Income Taxes .

Under this method, current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal year.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for net operating losses, and for tax credit carryforwards.

carryforwards.

Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.

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A valuation allowance is provided for when it is more likely than not that some or all of the deferred tax assets may not be realized in future years.

After weighing both the positive and negative evidence, the Company has recorded a valuation allowance with respect to realized capital losses for which the Company does not expect to generate capital gains in order to utilize the capital losses in the future and with respect to certain insignificant state credits which are not expected to be utilized before they expire.

The Company believes that it is more likely than not that all other deferred tax assets will be realized as of January 31, 2021.

The Company uses the tax law ordering approach of intraperiod allocation in determining when excess tax benefits have been realized for provisions of the tax law that identify the sequence in which those amounts are utilized for tax purposes.

The Company has also elected to exclude the indirect tax effects of share-based compensation deductions in computing the income tax provision recorded within the consolidated statement of operations and comprehensive income.

The Company has elected to exclude the indirect tax effects of share-based compensation deductions in computing the income tax provision or benefit recorded within the consolidated statement of operations and comprehensive income.

Also, the Company uses the portfolio approach in releasing income tax effects from accumulated other comprehensive income.

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For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit in the financial statements as the largest benefit that has a greater than 50% likelihood of being sustained upon settlement.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as a component of other expense in the Consolidated Statements of Operations and Comprehensive Income.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as a component of other income (expense), net in the consolidated statements of operations and comprehensive income.

Changes in facts and circumstances could have a material impact on the Company’s effective tax rate and results of operations.

Comprehensive income

Comprehensive income is defined as a change in equity of a business enterprise during a period, resulting from transactions from non-owner sources, including unrealized gains and losses on marketable securities prior to the February 1, 2018 adoption of ASU 2016-01.

Asset acquisitions

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Consideration paid for the acquisition of a business as defined by ASC 805-10 is allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date.

Acquisition-related expenses incurred in conjunction with the acquisition of a business are recognized in earnings in the period in which they are incurred and are included in other expense, net on the consolidated statement of operations.

During the years ended January 31, 2020, 2019 and 2018, the Company incurred expenses of $ 40.8 million, $ 2.1 million, and $ 2.2 million, respectively, for acquisition-related activity.

Acquisition-related expenses incurred in conjunction with the acquisition of a business are recognized in earnings in the period in which they are incurred and are included in other income (expense), net on the consolidated statements of operations and comprehensive income.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Management has made estimates for the allowance for doubtful accounts, capitalized software development costs, evaluating goodwill and long-lived assets for impairment, useful lives of property and equipment and intangible assets, accrued compensation, accrued liabilities, grant date fair value of stock options, and income taxes.

Actual results could differ from those estimates.

Recently adopted accounting pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (codified as "ASC 842"), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance.

ASC 842 requires that a lessee recognize a liability to make lease payments (the lease liability) and a ROU asset representing its right to use the underlying asset for the lease term on the balance sheet.

The Company adopted ASC 842 on February 1, 2019 using the modified retrospective transition method with the adoption date as the date of initial application.

Consequently, prior period balances and disclosures have not been restated.

The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date.

The adoption of ASC 842 on February 1, 2019 resulted in the recognition on the Company's consolidated balance sheet of both operating lease liabilities of $ 40.6 million and ROU assets of $ 38.0 million, which equals the lease liabilities net of accrued rent previously recorded on its consolidated balance sheet under previous guidance.

The adoption of ASC 842 did not have an impact on the Company's consolidated statement of operations, stockholders’ equity and cash flows for the year ended January 31, 2020.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes step two from the goodwill impairment test.

As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units' fair value.

This ASU should be applied prospectively.

We adopted the standard effective February 1, 2019, which had no impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract .

This ASU permits the capitalization of implementation costs incurred in a software hosting arrangement.

This ASU is effective for fiscal years beginning after December 15, 2019.

The Company elected to early adopt the new standard as of October 31, 2019 using the prospective transition method.

The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

Recently issued accounting pronouncements

In June 2016, the FASB issued ASU 2016-13 , Financial Instruments - Credit Losses:

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments, which requires financial assets measured at amortized cost be presented at the net amount expected to be collected.

This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Early adoption is permitted.

The Company does not plan to early adopt this ASU.

The Company believes the adoption of this ASU will not have a material impact on its consolidated financial statements.

In August 2018, FASB issued ASU 2018-13 , Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement , which amends ASC 820, "Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures.

The Company adopted the

new standard as of February 1, 2020 using the modified retrospective transition method.

The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, Fair Value Measurement .

ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures.

This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Early adoption is permitted.

As this relates to disclosure only, the Company believes the adoption of this ASU will not have a material impact on its consolidated financial statements.

The Company adopted the new standard as of February 1, 2020.

The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes.

This guidance will be effective for fiscal periods beginning after December 15, 2020, and early adoption is permitted.

The Company does not plan to early adopt this ASU, and is currently evaluating the impact of the new guidance on its consolidated financial statements.

Simplifying the Accounting for Income Taxes as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements.

The Company adopted the new standard as of February 1, 2020.

The Company retrospectively adopted the provision related to the classification of taxes partially based on income, and prospectively adopted the provisions related to intraperiod tax allocation and interim recognition of enactment of tax laws.

The adoption of this standard did not have a material effect on the Company’s current- or prior-period consolidated financial statements.

Net income per share

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Diluted $ 0.12 $ 0.58 $ 1.17

For the years ended January 31, 2020, 2019 and 2018, approximately 0.3 million, 0.1 million, and 0.6 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

For the fiscal years ended January 31, 2021, 2020 and 2019, 0.6 million, 0.3 million, and 0.1 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

Business combination

Acquisition of WageWorks

Overview and total consideration paid

On August 30, 2019, the Company closed the Acquisition of WageWorks for $ 51.35 per share in cash, or approximately $ 2.0 billion to WageWorks stockholders.

WageWorks Acquisition

On August 30, 2019, the Company closed the WageWorks Acquisition for $ 51.35 per share in cash, or $ 2.0 billion to WageWorks stockholders.

The Company financed the transaction through a combination of $ 816.9 million cash on hand plus net borrowings of approximately $ 1.22 billion, after deducting lender fees of approximately $ 30.5 million, under a term loan facility (see Note 8—Indebtedness).

Pursuant to the Merger Agreement, the Company replaced certain outstanding restricted stock units originally granted by WageWorks with the Company’s equivalent awards.

The outstanding WageWorks vested and unvested stock options, and certain unvested restricted stock units, were settled in cash as specified in the Merger Agreement.

The portion of the fair value of partially vested awards associated with pre-acquisition service of WageWorks award recipients represented a component of the total consideration, as presented below.

The Acquisition was accounted for under the acquisition method of accounting for business combinations.

Under this accounting method, the total consideration paid was:

(in millions)

Aggregate fair value of WageWorks stock acquired $ 2,018.8

Fair value of previously owned investment in WageWorks stock 81.4

Fair value of equity awards exchanged for cash attributable to pre-Acquisition service 18.1

Fair value of equity awards replaced attributable to pre-Acquisition service 3.8

Total consideration paid $ 2,122.1

The WageWorks Acquisition was accounted for under the acquisition method of accounting for business combinations.

Consideration paid was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date.

Management estimated the fair value of tangible and intangible assets and liabilities in accordance with the applicable accounting guidance for business combinations and utilized the services of third-party valuation consultants to value acquired intangible assets.

The initial allocation of the consideration paid was based on a preliminary valuation and is subject to potential adjustment during the measurement period (up to one year from the Acquisition date).

Balances subject to adjustment primarily include the valuations of acquired assets (tangible and intangible) and liabilities assumed, as well as tax-related matters.

The Company expects the allocation of the consideration transferred to be finalized within the measurement period.

The following table summarizes the Company's current allocation of the consideration paid:

The initial allocation of the consideration paid was based on a preliminary valuation and was subject to adjustment during the measurement period (up to one year from the acquisition date).

The purchase price allocation was finalized in the third quarter of fiscal year 2021.

The following table summarizes the Company's allocation of the consideration paid in the WageWorks Acquisition:

(in millions) Initial Allocation Adjustments Updated Allocation

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Total consideration paid $ 2,122.1 $ — $ 2,122.1

The Acquisition resulted in $ 1.33 billion of goodwill, which is attributable to several strategic, operational and financial benefits expected from the Acquisition, including custodial and interchange revenue synergies based on current contractual relationships, as well as operational cost synergies resulting from increased scale in service delivery and elimination of duplicative management functions and other back-office operational efficiencies.

The adjustments to the initial allocation are based on more detailed information obtained about the specific assets acquired, liabilities assumed, and tax-related matters.

The goodwill created in the Acquisition is not expected to be deductible for tax purposes.

The preliminary allocation of consideration exchanged to acquired identified intangible assets is as follows:

(in millions) Fair value Weighted-average remaining amortization period (years)

Customer relationships $ 598.5 15.0

Developed technology 96.9 4.5

Trade names & trademarks 12.3 3.0

Identified intangible assets subject to amortization 707.7 13.4

In-process software development costs 3.8 n/a

Total acquired intangible assets $ 711.5

The Company preliminary valued the acquired assets utilizing the discounted cash flow method, a form of the income approach.

In connection with the transaction, for the year ended January 31, 2020, the Company incurred approximately $ 40.8 million of acquisition costs, which are recorded as other expense, net.

For the year ended January 31, 2020, WageWorks contributed revenue of approximately $ 184.7 million

Adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired, liabilities assumed, and tax-related matters.

Pro forma information

The unaudited pro forma results presented below include the effects of the Acquisition as if it had been consummated as of February 1, 2018, with adjustments to give effect to pro forma events that are directly attributable to the Acquisition, which include adjustments related to the amortization of acquired intangible assets, interest income and expense, and depreciation.

The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the integration of WageWorks.

Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations.

The estimated pro forma revenue and net income includes the alignment of accounting policies, the effect of fair value adjustments related to the Acquisition, associated tax effects and the impact of the borrowings to finance the Acquisition and related expenses.

The unaudited pro forma results presented below include the effects of the WageWorks Acquisition as if it had been consummated as of February 1, 2018, with adjustments to give effect to pro forma events that are directly attributable to the WageWorks Acquisition, which include adjustments related to the amortization of acquired intangible assets, interest income and expense, and depreciation.

The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings from the integration of WageWorks.

Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the WageWorks Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations.

The estimated pro forma revenue and net income include the alignment of accounting policies, the effect of fair value adjustments related to the WageWorks Acquisition, associated tax effects and the impact of the borrowings to finance the WageWorks Acquisition and related expenses.

Year ended January 31,

(in thousands) 2020 2019

(in thousands) (unaudited) 2020 2019

Revenue $ 798,253 $ 765,801

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Selected consolidated balance sheet and consolidated statement of operations and comprehensive income components consist of the following:

Allowance for doubtful accounts

As of January 31, 2021 and 2020, the Company had an allowance for doubtful accounts of $ 4.2 million and $ 1.2 million, respectively.

During the fiscal years ended January 31, 2021, 2020, and 2019, the Company recorded credit losses from trade receivables of $ 3.4 million, $ 1.0 million, and $ 0.2 million, respectively.

Costs to obtain a contract

As of January 31, 2021 and 2020, the net amount capitalized as contract costs was $ 27.5 million and $ 21.8 million, respectively, which is included in other current assets and other assets.

Amortization of capitalized contract costs during the fiscal years ended January 31, 2021, 2020, and 2019 was $ 2.4 million, $ 1.9 million, and $ 1.5 million, respectively.

Property and equipment

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Property and equipment, net $ 29,106 $ 33,486

Depreciation expense for the years ended January 31, 2020, 2019 and 2018 was $ 8.9 million, $ 3.5 million and $ 2.8 million, respectively.

Other expense, net

Other expense, net, consisted of the following:

Depreciation expense for the fiscal years ended January 31, 2021, 2020 and 2019 was $ 16.0 million, $ 8.9 million and $ 3.5 million, respectively.

Contract balances

As of January 31, 2021 and 2020, the balance of deferred revenue was $ 4.1 million and $ 3.7 million, respectively.

Revenue recognized during the fiscal year that was included in the beginning balance of deferred revenue was $ 2.0 million.

The Company expects to satisfy its remaining obligations for these arrangements.

Other income (expense), net

Other income (expense), net, consisted of the following:

Year ended January 31,

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Acquisition costs ( 1,118 ) ( 40,810 ) ( 2,121 )

Other expense ( 1,934 ) ( 1,305 )

Total other expense, net $ ( 9,079 ) $ ( 1,582 )

Other income (expense) 5,080 ( 1,934 ) ( 1,305 )

Total other income (expense), net $ 5,007 $ ( 9,079 ) $ ( 1,582 )

The Company has entered into various non-cancelable operating lease agreements for office space, data storage facilities, and other leases with remaining lease terms of less than 1 year to approximately 10 years, often with one or more Company options to renew.

These renewal terms can extend the lease term from 3 to 10 years and are included in the lease term when it is reasonably certain that the Company will exercise the option.

Amortization and interest expense related to finance leases were not material during the years ended January 31, 2020 and 2019.

Amortization and interest expense related to finance leases were not material during the fiscal years ended January 31, 2021, 2020, and 2019.

The components of operating lease costs are as follows:

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(in thousands, except for term and percentages)

2021 2020 2019

Operating lease expense $ 16,073 $ 9,059 $ 5,456

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Weighted average lease term and discount rate are as follows:

As of January 31, 2020

Weighted average remaining lease term 9.41 years

January 31, 2021 January 31, 2020

Weighted average remaining lease term 9.02 years 9.41 years

Weighted average discount rate 4.32 % 4.35 %

Maturities of operating lease liabilities as of January 31, 2020 were as follows:

Fiscal year ending January 31, (in thousands) Operating leases

2021 $ 12,695

Thereafter 47,108

Total lease payments 98,552

Less imputed interest ( 18,134 )

As of January 31, 2021, our lease liabilities were as follows:

(in thousands) Operating leases

Gross lease liabilities $ 107,150

imputed interest ( 18,889 )

Present value of lease liabilities 88,261

Current $ 12,401

Non-current 68,017

Total lease liabilities $ 80,418

current portion of lease liabilities ( 14,037 )

Lease liabilities, non-current $ 74,224

As of January 31, 2021, the Company had additional operating leases for office space that have not yet commenced with aggregate undiscounted lease payments of $ 63.1 million.

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Operating cash flows from operating leases $ 12,941 $ 6,361

ROU assets obtained in exchange for new operating lease obligations $ 34,196

Right-of-use assets obtained in exchange for lease obligations $ 17,480 $ 34,196

Intangible assets and goodwill

Intangible assets

During the year ended January 31, 2020, the Company recorded $ 711.5 million of acquired identified intangible assets as a result of the Acquisition of WageWorks.

For further information about these acquired identified intangible assets, see Note 3—Business Combination.

During the years ended January 31, 2020 and 2019, the Company capitalized the following amounts to acquire the rights to act as a custodian of HSA portfolios:

(in thousands) January 31, 2020 January 31, 2019

Acquired HSA portfolios $ 7,659 $ 1,195

The Company has determined the acquired HSA portfolios to have a useful life of 15 years.

The assets are being amortized using the straight-line amortization method, which has been determined to be appropriate to reflect the pattern over which the economic benefits of existing assets are realized.

During the years ended January 31, 2020, 2019 and 2018, the Company capitalized software development costs of $ 24.1 million, $ 9.3 million and $ 8.1 million, respectively, related to significant enhancements and upgrades to its technology-enabled services platforms.

The gross carrying amount and associated accumulated amortization of intangible assets is as follows as of January 31, 2021 and January 31, 2020:

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Total intangible assets, net $ 767,003 $ 783,279

During the years ended January 31, 2020, 2019 and 2018, the Company expensed a total of $ 23.8 million, $ 13.7 million and $ 12.2 million, respectively, in software development costs primarily related to the post-implementation and operation stages of its proprietary software.

Amortization expense for the years ended January 31, 2020, 2019, and 2018 was $ 46.5 million, $ 14.7 million and $ 13.2 million, respectively.

During the fiscal year ended January 31, 2021, the Company capitalized $ 32.4 million to acquire the rights to act as a custodian of HSA portfolios.

Amortization expense for the fiscal years ended January 31, 2021, 2020, and 2019 was $ 99.9 million, $ 46.5 million and $ 14.7 million, respectively.

Estimated amortization expense for the years ending January 31 is as follows:

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Total $ 767,003

During the year ended January 31, 2020, the Company recorded $ 1.33 billion of goodwill from the Acquisition of WageWorks.

For further information about the resulting goodwill, see Note 3—Business Combination.

There were no other changes to the goodwill carrying value during the years ended January 31, 2020, 2019, and 2018.

The Company’s annual goodwill impairment test resulted in no impairment charges in any of the periods presented in the accompanying consolidated financial statements.

During the fiscal year ended January 31, 2021, goodwill decreased by $ 5.4 million due to measurement period adjustments related to the WageWorks Acquisition.

During the fiscal year ended January 31, 2020, the Company recorded $ 1.33 billion of goodwill from the WageWorks Acquisition and related measurement period adjustments.

There were no other changes to the goodwill carrying value during the fiscal years ended January 31, 2021 and 2020.

Commitments and contingencies

In addition to the indebtedness described in Note 8 below, the Company’s principal commitments consist of operating lease obligations for office space , data storage facilities, and other leases, a processing services agreement with a vendor, and contractual commitments related to network infrastructure, equipment, and certain maintenance agreements under long-term, non-cancelable commitments.

Future minimum lease payments under non-cancelable operating leases, excluding the contractual sublease income of $ 5.5 million, which is expected to be received through February 2023, and other agreements, are as follows:

Year ending January 31, (in thousands) Office leases Other agreements(1) Total

2021 $ 13,064 $ 21,912 $ 34,976

2022 17,610 14,628 32,238

2023 17,846 12,001 29,847

2024 15,973 1,245 17,218

2025 16,050 403 16,453

Thereafter 99,530 — 99,530

The following table summarizes the payments due by fiscal year for our outstanding contractual obligations as of January 31, 2021:

Payments due by fiscal year

(in thousands) 2022 2023 2024 2025 2026 Thereafter Total

Long-term debt obligations (1) $ 62,500 $ 70,313 $ 101,562 $ 768,750 $ — $ — $ 1,003,125

Interest on long-term debt obligations (2) 19,639 18,451 16,893 8,877 — — 63,860

Operating lease obligations (3) 15,809 18,082 16,094 16,341 16,683 87,235 170,244

Other contractual obligations (4) 21,948 15,645 1,756 402 — — 39,751

Total $ 119,896 $ 122,491 $ 136,305 $ 794,370 $ 16,683 $ 87,235 $ 1,276,980

(1) Other agreements does not include payments required under the Company's term loan facility.

Refer to Note 8—Indebtedness.

Subsequent to the Acquisition of WageWorks, the Company entered into non-cancelable agreements to acquire the rights to administer WageWorks HSAs currently administered by third-party custodians.

The amounts due under these agreements are primarily variable in nature based on the number of HSAs transferred.

The fixed amounts due have been included in the schedule above.

Lease expense was $ 9.1 million, $ 5.5 million, $ 4.3 million for the years ended January 31, 2020, 2019, and 2018, respectively.

Sublease income was $ 0.8 million for the year ended January 31, 2020.

(1) As of January 31, 2021, our outstanding principal of $ 1.00 billion is presented net of debt issuance costs on our consolidated balance sheets.

The debt issuance costs are not included in the table above.

The debt maturity date is August 31, 2024.

The amount required to be repaid in fiscal year 2025 reflects the $ 200.0 million prepayment made in July 2020 with proceeds from the follow-on offering.

(2) Estimated interest payments assume the stated interest rate applicable as of January 31, 2021 of 1.87 % per annum on a $ 1.00 billion outstanding principal amount.

(3) We lease office space, data storage facilities, and other leases under non-cancelable operating leases expiring at various dates through 2031.

These amounts exclude contractual sublease income of $ 3.7 million, which is expected to be received through February 2023.

(4) Other contractual obligations consist of processing services agreements, telephony services, immaterial finance leases, and other contractual commitments.

Subsequent to the WageWorks Acquisition, the Company entered into non-cancelable agreements to acquire the rights to administer WageWorks HSAs currently administered by third-party custodians.

The remaining amounts due under these agreements are primarily variable in nature based on the number of HSAs transferred.

Contingencies

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Legal matters

WageWorks is pursuing an affirmative claim against the Office of Personnel Management ("OPM") to obtain payment for services provided by WageWorks between March 1, 2016 and August 31, 2016 pursuant to its contract with OPM.

In connection with WageWorks' claims against OPM, OPM has brought a claim against WageWorks contending that it was not entitled to any payments until WageWorks replaced the prior administrator and started processing claims on September 1, 2016.

Both WageWorks and OPM have filed opposing for summary judgment with the Civilian Board of Contract Appeals, which motions remain pending.

WageWorks previously pursued affirmative claims against the Office of Personnel Management ("OPM") to obtain payment for services provided by WageWorks between March 1, 2016 and August 31, 2016 pursuant to its contract

On December 18, 2020, the United States Civilian Board of Contract Appeals granted in part WageWorks' motion for summary judgment and denied OPM's motion for summary judgment, ending the dispute in WageWorks' favor.

In addition, it was stipulated that OPM would pay WageWorks $ 6.8 million, which is included within other income (expense), net, on the January 31, 2021 consolidated statement of operations and comprehensive income.

On March 9, 2018, a putative class action was filed in the U.S.

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The complaint also alleges claims under the Securities Act of 1933, as amended, arising from WageWorks’ June 19, 2017 common stock offering against those same defendants, as well as the members of its board of directors at the time of that offering.

On February 11, 2021, counsel for all parties involved in this lawsuit signed a term sheet to settle all claims for $ 30.0 million, of which WageWorks will contribute $ 5.0 million and its insurers will pay the remaining $ 25.0 million.

The $ 30.0 million settlement and related $ 25.0 million insurance recovery are included within accrued liabilities and other current assets, respectively, on the January 31, 2021 consolidated balance sheet, and the net $ 5.0 million expense is included within merger integration expense on the January 31, 2021 consolidated statement of operations and comprehensive income.

The settlement is subject to notice to class members and approval of the Court.

On June 22, 2018 and September 6, 2018, two derivative lawsuits were filed against certain of WageWorks’ former officers and directors and WageWorks (as nominal defendant) in the Superior Court of the State of California, County of San Mateo.

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The allegations in the Derivative Suits relate to substantially the same facts as those underlying the Securities Class Action described above.

The plaintiffs seek unspecified damages and fees and costs.

The plaintiffs seek unspecified damages, fees and costs.

Plaintiffs in the Superior Court action filed an amended consolidated complaint on October 28, 2019, naming as defendants certain former officers and directors of WageWorks and alleging a direct claim of "inseparable fraud/breach of fiduciary duty" on behalf of a class.

WageWorks was not named as a party in that complaint.

On June 24, 2020, the court granted the defendants’ motion to dismiss the amended complaint.

The plaintiffs subsequently filed a notice of appeal.

The District Court action is stayed.

On February 16, 2021, a complaint was filed in the United States District Court for the Northern District of California against WageWorks, its former Chief Executive Officer, and its former Chief Financial Officer.

The allegations in this suit relate to substantially the same facts as those underlying the Securities Class Action described above and the SEC settlement involving the former executives described below.

The action alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as common law fraud and negligent misrepresentation.

The Company has not yet responded to the complaint.

Plaintiffs seek unspecified damages and costs.

WageWorks voluntarily contacted the San Francisco office of the SEC Division of Enforcement regarding the restatement of WageWorks' financial statements and related independent investigation.

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Attorney’s Office regarding the matter.

Beginning on July 30, 2019, putative class action suits were filed in the U.S.

District Court Courts for the Southern District of New York, the District of Delaware, and the Northern District of California asserting claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, against WageWorks and the former members of its board of directors.

The complaints generally allege disclosure violations in the proxy statement issued by WageWorks in connection with the stockholder vote on the proposed merger with the Company.

After WageWorks issued certain supplemental disclosures, these actions were voluntarily dismissed, but WageWorks may still be required to pay attorneys fees to the plaintiffs' lawyers.

WageWorks previously entered into indemnification agreements with its former directors and officers and, pursuant to these indemnification agreements, is covering the defense of its former directors and officers in the legal proceedings described above.

On February 2, 2021, the SEC announced charges against two former WageWorks executives and reached a settlement with these former executives.

As part of the settlement, the two executives agreed to reimburse WageWorks for a total of $ 2.1 million.

WageWorks previously entered into indemnification agreements with its former directors and officers and, pursuant to these indemnification agreements, is covering the defense fees and costs of its former directors and officers in the legal proceedings described above.

The Company and its subsidiaries are involved in various other litigation, governmental proceedings and claims, not described above, that arise in the normal course of business.

While it is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings or claims, the Company believes, based on current knowledge, that such litigation, proceedings and claims will not have a material impact on the Company’s financial position, results of operations and cash flows for the period.

It is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings or claims, or the impact that such litigation, proceedings and claims will have on the Company’s financial position, results of operations, and cash flows.

The Company maintains liability insurance coverage that is intended to cover the legal matters described above;

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(1) In addition to the $ 16.4 million of unamortized issuance costs related to the term loan facility, $ 5.0 million of unamortized issuance costs related to our revolving credit facility are included within other assets on the January 31, 2021 consolidated balance sheet.

In connection with the closing of the Acquisition, on August 30, 2019, the Company entered into a credit facility (the "Credit Agreement”) that provided for:

(i) a five -year senior secured term loan A facility (the “Term Loan Facility”), in an aggregate principal amount of $ 1.25 billion, the proceeds of which were used to finance the Acquisition, to refinance substantially all outstanding indebtedness of HealthEquity and WageWorks and to pay related fees and expenses;

may be used for working capital and general corporate purposes, including acquisitions and other investments.

In connection with the closing of the WageWorks Acquisition, on August 30, 2019, the Company entered into a credit facility (the "Credit Agreement”) that provided for:

(i) a five-year senior secured term loan A facility (the “Term Loan Facility”), in an aggregate principal amount of $ 1.25 billion, the proceeds of which were used to finance the WageWorks Acquisition, to refinance substantially all outstanding indebtedness of HealthEquity and WageWorks and to pay related fees and expenses;

(ii) a five-year senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Facilities”), in an aggregate principal amount of up to $ 350 million, which may be used for working capital and general corporate purposes, including acquisitions and other investments.

No amounts were drawn under the Revolving Credit Facility as of January 31, 2021.

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The Company is also required to pay certain fees to the lenders, including, among others, a quarterly commitment fee on the average unused amount of the Revolving Credit Facility at a rate ranging from 0.20 % to 0.40 %, with the applicable rate also determined by reference to a leverage-based pricing grid set forth in the Credit Agreement.

The loans made under the Term Loan Facility are required to be repaid as described in the following table:

Fiscal year ending January 31, (in millions) Principal payments

Total principal payments $ 1,242.2

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational documents, in each case, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains financial performance covenants, which require the Company to maintain (i) a maximum total net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 5.25 to 1.00, which steps down to (x) 5.00 to 1.00 beginning with the fiscal quarter ending July 31, 2020 and (y) 4.50 to 1.00 beginning with the fiscal quarter ending July 31, 2021 (subject to a customary “acquisition holiday” provision that allows the maximum total net leverage ratio to increase to 5.00 to 1.00 for the four fiscal quarter period ending on or following the date of a permitted acquisition by the Company in excess of $ 100 million), and (ii) a minimum interest coverage ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational documents, in each case, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains financial performance covenants, which require the Company to maintain (i) a maximum total net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 5.00 to 1.00, which steps down to 4.50 to 1.00 beginning with the fiscal quarter ending July 31, 2021 (subject to a customary “acquisition holiday” provision that allows the maximum total net leverage ratio to increase to 5.00 to 1.00 for the four fiscal quarter period ending on or following the date of a permitted acquisition by the Company in excess of $ 100 million), and (ii) a minimum interest coverage ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00.

The Company was in compliance with all covenants under the Credit Agreement as of January 31, 2021, and for the period then ended.

The obligations of HealthEquity under the Credit Agreement are required to be unconditionally guaranteed by WageWorks and each of the Company's subsequently acquired or organized direct and indirect domestic subsidiaries and are secured by security interests in substantially all assets of HealthEquity and the guarantors, in each case, subject to certain customary exceptions.

The income tax provision consisted of the following:

The income tax provision (benefit) consisted of the following:

Year ended January 31,

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State ( 3,503 ) 127 ( 850 )

Total deferred tax provision $ 3,665 $ 408 $ 4,305

Total income tax provision $ 3,491 $ 1,919 $ 4,827

Total income tax provision differed from the amounts computed by applying the U.S.

Total deferred tax provision (benefit) $ ( 5,133 ) $ 3,665 $ 408

Total income tax provision (benefit) $ ( 4,694 ) $ 3,491 $ 1,919

Total income tax provision (benefit) differed from the amounts computed by applying the U.S.

federal statutory income tax rate to income before income taxes as a result of the following:

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Non-taxable gain on investment in subsidiary — ( 5,790 ) —

Deferred tax rate adjustment due to tax reform — — 458

Current statutory rate differential due to tax reform — — ( 308 )

Reclassification of operating lease right-of-use assets 185 — —

Change in net operating losses due to measurement period adjustments 377 — —

Deferred tax rate adjustment due to merger integration ( 1,814 ) 225 —

Return-to-provision adjustments ( 1,010 ) ( 332 ) ( 19 )

Change in valuation allowance ( 145 ) 93 10

Other items, net ( 45 ) ( 55 ) 134

Total income tax provision $ 3,491 $ 1,919 $ 4,827

The Company’s effective income tax rate for the years ended January 31, 2020, 2019 and 2018 was 8.1 %, 2.5 %, and 9.2 %, respectively.

Total income tax provision (benefit) $ ( 4,694 ) $ 3,491 $ 1,919

The Company’s effective income tax rate for the fiscal years ended January 31, 2021, 2020, and 2019 was an effective income tax benefit rate of 113.4 % and an effective income tax expense rate of 8.1 % and 2.5 %, respectively.

The difference between the effective income tax rate and the U.S.

federal statutory income tax rate each period is impacted by a number of factors, including the relative mix of earnings among state jurisdictions, credits, excess tax benefits or shortfalls on stock-based compensation expense due to the adoption of ASU 2016-09, and other discrete items.

The increase in the effective tax rate for the year ended January 31, 2020 over the year ended January 31, 2019 was primarily due to a decrease in excess tax benefits on stock-based compensation expense recognized in the provision for income taxes relative to pre-tax income and an increase in non-deductible expenses, which were offset by exclusion of the gain in connection with our equity investment in WageWorks that will not be realized for income tax purposes.

The decrease in the effective tax rate for the year ended January 31, 2019 compared to the year ended January 31, 2018 was primarily due to the reduction in the US federal corporate income tax rate from 35% to 21% as a result of legislative changes effective January 1, 2018 and an increase in federal and state research and development tax credits over prior periods.

The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, included a reduction of the statutory corporate income tax rate from a top rate of 35% to 21% effective January 1, 2018.

The Company is subject to federal and state income taxes in the United States based on a calendar year which differs from its January fiscal year-end for financial reporting purposes.

For purposes of reconciling the total income tax provision for the fiscal year ended January 31, 2018, the Company applied a federal statutory rate of 34% for the entire fiscal year as this was the rate that applies for the tax year ended December 31, 2017 which comprised 11 months of the fiscal year.

Because a 21% federal statutory rate applied for the one month ending January 31, 2018, a reconciling item was included in the tax rate reconciliation table above to adjust for the statutory rate reduction that applied to this one-month period.

This resulted in a reduction to the income tax provision of $ 0.3 million.

The decrease in the effective tax rate for the fiscal year ended January 31, 2021 from the fiscal year ended January 31, 2020 was primarily due to an increase in excess tax benefits on stock-based compensation expense, deferred tax rate adjustments due to merger integration, and research and development credits recognized in the provision for income taxes relative to pre-tax income.

The increase in the effective tax rate for the fiscal year ended January 31, 2020 compared to the fiscal year ended January 31, 2019 was primarily due to a decrease in excess tax benefits on stock-based compensation expense recognized in the provision for income taxes relative to pre-tax income and an increase in non-deductible expenses, which were offset by exclusion of the gain in connection with our equity investment in WageWorks that will not be realized for income tax purposes.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law.

The CARES Act, among other things, provides various income and payroll tax provisions to provide economic and other relief from the COVID-19 pandemic.

The CARES Act did not have a material impact on our income tax expense or effective tax rate for 2020.

Deferred tax assets and liabilities consisted of the following:

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Lease liabilities 21,813 20,232

Deferred rent — 626

Accruals and reserves 10,591 6,854

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Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment and determined that based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that the Company will be able to realize most of its deferred tax assets.

However, the Company recorded a valuation allowance of $ 0.2 million and $ 0.1 million as of January 31, 2020 and January 31, 2019, respectively.

The increase in valuation allowance recorded is primarily the result of state tax credits that are not expected to be utilized before they expire.

As of January 31, 2020, the Company had recorded gross state net operating loss carryforwards of $ 20.5 million which begin to expire at various intervals following the tax year ending December 31, 2024.

As of January 31, 2020, the Company also had federal and state research and development carryforwards of $ 3.6 million and $ 7.8 million, respectively, which begin to expire following the tax years ending December 31, 2038 and 2022, respectively.

However, the Company recorded a valuation allowance of $ 0.1 million and $ 0.2 million as of January 31, 2021 and 2020, respectively.

The decrease in valuation allowance recorded is primarily the result of state tax credits that are expected to be utilized before expiration, and the remaining valuation allowance as of January 31, 2021 relates to capital loss carryovers.

As of January 31, 2021, the Company had no remaining federal net operating loss carryforward and had gross state net operating loss carryforwards of $ 26.9 million which begin to expire at various intervals following the tax year ending January 31, 2028.

As of January 31, 2021, the Company also had federal and state research and development credits of $ 5.3 million and $ 8.5 million, respectively, which begin to expire following the tax years ending January 31, 2037 and 2022, respectively.

As of January 31, 2021 and 2020, the gross unrecognized tax benefit was $ 10.2 million and $ 9.4 million, respectively.

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Total gross unrecognized tax benefits increased by $ 0.8 million in the period from January 31, 2020 to January 31, 2021.

A tabular reconciliation of the beginning and ending amount of gross unrecognized tax benefits, including the impact of purchase accounting from the Acquisition, is as follows:

A tabular reconciliation of the beginning and ending amount of gross unrecognized tax benefits, including the impact of purchase accounting from the WageWorks Acquisition, is as follows:

(in thousands) January 31, 2021 January 31, 2020

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Gross unrecognized tax benefits at end of year $ 10,206 $ 9,370

Certain unrecognized tax benefits are required to be netted against their related deferred tax assets as a result of Accounting Standards Update No.

Certain unrecognized tax benefits are required to be netted against their related deferred tax assets as a result of ASU No.

2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists .

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Total gross unrecognized tax benefits $ 10,206 $ 9,370

Amounts netted against related deferred tax assets ( 8,914 ) ( 1,693 )

Amounts netted against related deferred tax assets or tax receivables ( 9,574 ) ( 8,914 )

Unrecognized tax benefits recorded on the consolidated balance sheet $ 632 $ 456

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of other expense in the statement of operations and comprehensive income.

During the year ended January 31, 2020, the Company recorded penalties and interest of $ 0.1 million related to unrecognized tax benefits.

There were no interest and penalties recorded related to unrecognized tax benefits during the years ended January 31, 2019 and 2018 in the statement of operations and comprehensive income.

As of January 31, 2020, accrued interest and penalties of $ 0.6 million were recorded, of which $ 0.5 million related to existing balances from the Acquisition recorded through purchase accounting.

As of January 31, 2019, no accrued interest and penalties were recorded.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of other income (expense), net in the statement of operations and comprehensive income.

During the fiscal years ended January 31, 2021 and 2020, the Company recorded penalties and interest of $ 0.2 million and $ 0.1 million, respectively, related to unrecognized tax benefits.

No interest and penalties were recorded related to unrecognized tax benefits during the year ended January 31, 2019.

As of January 31, 2021 and 2020, accrued interest and penalties of $ 0.8 million and $ 0.6 million, respectively, were recorded, of which $ 0.5 million related to existing balances from the WageWorks Acquisition recorded through purchase accounting.

The Company files income tax returns with U.S.

federal and state taxing jurisdictions and is not currently under examination with any jurisdiction.

federal and state taxing jurisdictions and is currently under examination by the IRS and in the states of California and Texas.

These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses.

As a result of the Company's net operating loss carryforwards and tax credit carryforwards, the Company remains subject to examination by one or more jurisdictions for tax years after 2001.

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The Company grants stock options, restricted stock units ("RSUs"), and restricted stock awards ("RSAs") under the HealthEquity, Inc.

2014 Equity Incentive Plan (as amended and restated, the "Incentive Plan"), which provided for the issuance of stock awards to the directors and team members of the Company to purchase up

to an aggregate of 2.6 million shares of common stock.

As described below, in connection with the Acquisition, the shares of common stock available for issuance under the Incentive Plan were increased by 5.3 million shares.

2014 Equity Incentive Plan (as amended and restated, the "Incentive Plan"), which provided for the issuance of stock awards to the directors and team members of the Company to purchase up to an aggregate of 2.6 million shares of common stock.

In addition, under the Incentive Plan, the number of shares of common stock reserved for issuance under the Incentive Plan automatically increases on February 1 of each year, beginning as of February 1, 2015 and continuing through and including February 1, 2024, by 3 % of the total number of shares of the Company’s capital stock outstanding on January 31 of the preceding fiscal year, or a lesser number of shares determined by the board of directors.

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WageWorks Incentive Plan.

At the closing of the Acquisition, and in accordance with the Merger Agreement, certain RSUs with respect to WageWorks common stock, granted under WageWorks, Inc.

2010 Equity Incentive Plan (the "WageWorks Incentive Plan"), were replaced by the Company and converted into RSUs with respect to 523,318 shares of common stock of the Company.

In connection with the Acquisition, an additional 5,255,027 shares of the Company, representing the remaining number of shares of common stock of WageWorks that were available for issuance under the WageWorks Incentive Plan immediately prior to the Acquisition, became available for issuance under the Incentive Plan.

The additional shares may be utilized for equity-based awards to be granted under the Incentive Plan, provided that (i) the period during which such shares are available under the Incentive Plan may not be extended beyond the period during which they would have been available under the WageWorks Incentive Plan, absent the Acquisition, and (ii) such equity-based awards may not be granted to individuals who were employees, directors or consultants of HealthEquity or its affiliates at the time the Acquisition was consummated.

At the closing of the WageWorks Acquisition, and in accordance with the Merger Agreement, certain RSUs with respect to WageWorks common stock, granted under WageWorks, Inc.

2010 Equity Incentive Plan (the "WageWorks Incentive Plan"), were replaced by the Company and converted into RSUs with respect to 0.5 million shares of common stock of the Company.

No additional shares were issued under the WageWorks Incentive Plan, and the period during which the remaining 5.3 million shares were available to be utilized expired on May 26, 2020.

Stock options

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The variables include, but are not limited to, (1) the expected life of the option, (2) the expected volatility of the fair value of the Company's common stock over the term of the award estimated by averaging the Company's historical volatility in addition to published volatilities of a relative peer group, (3) risk-free interest rate, and (4) expected dividends.

The weighted-average fair value of options granted during the years ended January 31, 2020, 2019 and 2018 was $ 25.97 , $ 26.40 and $ 17.16 per share, respectively.

The key input assumptions that were utilized in the valuation of the stock options granted during the years ended January 31, 2020, 2019 and 2018 are as follows:

The weighted-average fair value of options granted during the fiscal years ended January 31, 2021, 2020 and 2019 was $ 23.68 , $ 25.97 and $ 26.40 per share, respectively.

The key input assumptions that were utilized in the valuation of the stock options granted during the fiscal years ended January 31, 2021, 2020 and 2019 are as follows:

Year ended January 31,

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Expected volatility is determined using weighted average volatility of publicly traded peer companies.

During the year ended January 31, 2019, the Company began using its own historical volatility in addition to the volatility of publicly traded peer companies, as its share price history grows over time.

The risk-free interest rate is determined by using published zero coupon rates on treasury notes for each grant date given the

expected term on the options.

During the fiscal year ended January 31, 2019, the Company began using its own historical volatility in addition to the volatility of publicly traded peer companies, as its share price history grows over time.

The risk-free interest rate is determined by using published zero coupon rates on treasury notes for each grant date given the expected term on the options.

The dividend yield of zero is based on the fact that the Company expects to invest cash in operations.

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The aggregate intrinsic value in the table above represents the difference between the estimated fair value of common stock and the exercise price of outstanding, in-the-money stock options.

The total intrinsic value of options exercised during the years ended January 31, 2020, 2019 and 2018 was $ 22.5 million, $ 65.5 million, and $ 44.8 million, respectively.

As of January 31, 2020, the weighted-average vesting period of non-vested awards expected to vest is approximately 1.4 years;

The total intrinsic value of options exercised during the fiscal years ended January 31, 2021, 2020 and 2019 was $ 15.4 million, $ 22.5 million, and $ 65.5 million, respectively.

As of January 31, 2021, the weighted-average vesting period of non-vested awards expected to vest is approximately 1.0 year;

the amount of compensation expense the Company expects to recognize for stock options vesting in future periods is approximately $ 2.9 million.

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RSUs and RSAs are valued based on the current value of the Company's closing stock price on the date of grant less the present value of future expected dividends discounted at the risk-free interest rate.

The weighted-average fair value of RSUs granted during the years ended January 31, 2020, 2019 and 2018 was $ 65.20 , $ 67.69 and $ 44.61 per share, respectively.

Acquisition of WageWorks.

As described above, at the closing of the Acquisition, and in accordance with the Merger Agreement, 523,318 service-based RSUs with respect to WageWorks common stock were replaced by the Company and converted into RSUs with respect to common stock of the Company.

These replaced awards are included in the granted amounts in the summary of RSU and RSA activity below.

The awards replaced by the Company in the Acquisition were measured at the Acquisition date based on the estimated fair value of $ 29.7 million.

A portion of that fair value, $ 3.8 million, which represented the pre-Acquisition service provided by team members to WageWorks, was included in the total consideration paid as part of the Acquisition.

As of the closing of the Acquisition, the remaining portion of the fair value of those awards was $ 25.9 million, representing post-Acquisition share-based compensation expense, $ 8.1 million of which was recognized during the year ended January 31, 2020 as acquisition-related costs, and the remainder of which will be recognized in the ordinary course as these team members provide service over the remaining vesting periods.

Additionally, at the closing of the Acquisition, and in accordance with the Merger Agreement, the Company exchanged for cash certain WageWorks equity awards measured at the Acquisition date based on the estimated fair value of $ 23.6 million.

A portion of that fair value, $ 18.1 million, which represented the pre-Acquisition service provided by team members to WageWorks, was included in the total consideration paid as part of the Acquisition.

As of the closing of the Acquisition, the remaining portion of the fair value of the awards exchanged for cash was $ 5.6 million, representing post-Acquisition share-based compensation expense that was recognized during the year ended January 31, 2020.

The weighted-average fair value of RSUs granted during the fiscal years ended January 31, 2021, 2020 and 2019 was $ 56.93 , $ 65.20 and $ 67.69 per share, respectively.

Performance restricted stock units and awards.

In March 2017, the Company awarded 146,964 performance-based RSUs ("PRSUs").

The Company records stock-based compensation related to PRSUs when it is considered probable that the performance conditions will be met.

Issuance of the underlying shares occurs upon approval by

the Compensation Committee of the board of directors, based on the level of achievement of the performance goal as measured on January 31, 2020.

The performance conditions allow for a range of vesting from 0 % to 150 %.

In March 2018, the Company awarded 227,760 performance-based RSAs ("PRSAs").

Vesting of the PRSAs is dependent upon the achievement of certain financial criteria measured on January 31, 2021, and cliff vest upon approval by the Compensation Committee.

The Company records stock-based compensation related to PRSAs when it is considered probable that the performance conditions will be met.

Issuance of the underlying shares occurred at the grant date.

The Company believes it is probable that the PRSAs will vest at least in part.

The vesting of the PRSAs will ultimately range from 0 % to 200 % based on the level of achievement of the performance goals.

The PRSAs were issued at the 200 % level of achievement.

As the underlying shares were issued at grant date, they are subject to clawback based on actual Company performance.

In March 2019, the Company awarded 129,963 PRSUs.

Vesting of the PRSUs is dependent upon the achievement of certain financial criteria measured on January 31, 2022.

The PRSUs cliff vest and are issued upon approval by the Compensation Committee.

The Company records stock-based compensation related to PRSUs when it is considered probable that the performance conditions will be met.

The Company believes it is probable that the PRSUs will vest at least in part.

The vesting of the PRSUs will ultimately range from 0 % to 200 % of the number of shares underlying the PRSU grant based on the level of achievement of the performance goals.

As a result of the Acquisition, the Compensation Committee is considering revisions to existing PRSU and PRSA performance goals, including those measured as of January 31, 2020.

During the first quarter of the fiscal year ended January 31, 2019, the Company awarded 227,760 performance-based restricted stock awards (the “FY19 PRSAs”).

The Company records stock-based compensation related to the FY19 PRSAs when it is considered probable that the performance conditions will be met.

The underlying shares were issued at 200 % of the target level of achievement at the grant date.

In March 2020, the Compensation Committee modified the vesting conditions of the FY19 PRSAs by basing the first two years of the award solely on the Company’s revenue compound annual growth rate (“CAGR”) for the first two years , exclusive of the revenue recognized through the WageWorks Acquisition, and measured using the original revenue CAGR targets set by the Compensation Committee in respect of such awards.

As a result, two-thirds of the FY19 PRSAs were deemed by the Compensation Committee to be earned at target;

however, despite this determination, and in order to encourage retention of our executive officers, our executive officers were required to remain employed until the remaining performance conditions for the FY19 PRSAs were certified by the Compensation Committee, which occurred in March 2021.

The remaining one-third of the FY19 PRSAs were modified to vest based on the Company’s net cash provided by operating activities (as defined under GAAP) relative to target given the importance of the Company generating sufficient cash flow to service the additional indebtedness incurred in connection with the WageWorks Acquisition.

The modification affected 10 team members and did not result in an adjustment to stock-based compensation expense.

The Company's actual net cash provided by operating activities for the year ended January 31, 2021 was 163 % of the target level of achievement.

The FY19 PRSAs cliff vested upon approval by the Compensation Committee in March 2021.

During the first quarter of the fiscal year ended January 31, 2020, the Company awarded 129,963 PRSUs (the “FY20 PRSUs”).

The Company records stock-based compensation related to the FY20 PRSUs when it is considered probable that the performance conditions will be met.

In March 2020, the Compensation Committee modified the vesting conditions of the FY20 PRSUs by basing the first year of the award solely on the Company’s revenue CAGR for the first year, exclusive of the revenue recognized through the WageWorks Acquisition, and measured using the original revenue CAGR targets set by the Compensation Committee in respect of such awards.

As a result, one-third of the FY20 PRSUs were deemed by the Compensation Committee to be earned at target;

however, despite this determination, and in order to encourage retention of our executive officers, our executive

officers must remain employed until the remaining performance conditions for the FY20 PRSUs are certified by the Compensation Committee, which we expect to occur in March 2022.

The remaining two-thirds of the FY20 PRSUs will vest based on the Company’s net cash provided by operating activities (as defined under GAAP) relative to target given the importance of the Company generating sufficient cash flow to service the additional indebtedness incurred in connection with the WageWorks Acquisition.

The modification affected 12 team members and resulted in incremental stock-based compensation expense of $ 6.6 million, which will be recognized over the remaining service period, adjusted for the level of achievement of the performance conditions and any forfeitures.

Prior to the modification, the Company did not believe the FY20 PRSUs were likely to vest, and as a result, $ 2.9 million of previously recorded stock-based compensation expense was reversed during the three months ended April 30, 2020.

The FY20 PRSUs cliff vest upon approval by the Compensation Committee.

The modified performance conditions for the remaining two-thirds tranche allow for a range of vesting from 0 % to 200 % based on the level of achievement of the new performance conditions, and the Company believes it is probable that the FY20 PRSUs will vest at least in part.

During the first and second quarters of the fiscal year ended January 31, 2021, the Company awarded 277,950 PRSUs subject to a market condition based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index as measured on January 31, 2023.

The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was approximately $ 20.8 million.

Compensation expense is recorded if the service condition is met regardless of whether the market condition is satisfied.

The market condition allows for a range of vesting from 0 % to 200 % based on the level of performance achieved.

The PRSUs cliff vest upon approval by the Compensation Committee.

A summary of the RSU and RSA activity is as follows:

6 unchanged sentences

Outstanding as of January 31, 2021 1,832 $ 60.41 193 $ 61.77

During the years ended January 31, 2020, 2019 and 2018 the aggregate intrinsic value of RSUs and RSAs vested was $ 25.0 million, $ 6.4 million, and $ 0.7 million, respectively.

During the fiscal years ended January 31, 2021, 2020 and 2019 the aggregate intrinsic value of RSUs and RSAs vested was $ 31.8 million, $ 25.0 million, and $ 6.4 million, respectively.

Total unrecorded stock-based compensation expense as of January 31, 2021 associated with RSUs and PRSUs was $ 84.8 million, which is expected to be recognized over a weighted-average period of 2.5 years.

18 unchanged sentences

The plan provides for Company matching of employee contributions up to 3.5 % of eligible earnings.

Employer matching contribution expense was $ 3.7 million, $ 1.8 million and $ 1.4 million for the years ended January 31, 2020, 2019 and 2018, respectively.

Employer matching contribution expense was $ 6.5 million, $ 3.7 million and $ 1.8 million for the fiscal years ended January 31, 2021, 2020 and 2019, respectively.

The Company is self-insured for medical and dental benefits for all qualifying employees.

2 unchanged sentences

The Company's liability for self-insured medical claims is included in accrued compensation in its consolidated balance sheet and was $ 3.5 million and $ 3.7 million as of January 31, 2021 and 2020, respectively.

Supplementary quarterly financial data (unaudited)

Three months ended

(in thousands, except for per share amounts) January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019

Total revenue $ 201,200 $ 157,118 $ 86,623 $ 87,052

Total cost of revenue 87,519 61,083 28,183 29,299

Gross profit 113,681 96,035 58,440 57,753

Total operating expenses 99,139 86,113 33,576 30,075

Total other income (expense) ( 15,149 ) ( 41,174 ) ( 1,128 ) 23,600

Income tax provision (benefit) ( 417 ) ( 9,918 ) 4,370 9,456

Net income (loss) $ ( 190 ) $ ( 21,334 ) $ 19,366 $ 41,822

Net income (loss) per share (1):

Basic $ — $ ( 0.30 ) $ 0.30 $ 0.67

Diluted $ — $ ( 0.30 ) $ 0.30 $ 0.65

Three months ended

(in thousands, except for per share amounts) January 31, 2019 October 31, 2018 July 31, 2018 April 30, 2018

Total revenue $ 75,777 $ 70,495 $ 71,067 $ 69,904

Total cost of revenue 31,332 24,678 24,492 25,548

Gross profit 44,445 45,817 46,575 44,356

Total operating expenses 27,864 26,831 25,012 23,816

Total other income (expense) ( 221 ) ( 1,555 ) ( 75 ) ( 1 )

Income tax provision (benefit) 3,241 1,745 ( 1,029 ) ( 2,038 )

Net income $ 13,119 $ 15,686 $ 22,517 $ 22,577

Net income per share (1):

Basic $ 0.21 $ 0.25 $ 0.36 $ 0.37

Diluted $ 0.21 $ 0.25 $ 0.36 $ 0.36

(1) Net income (loss) per share amounts may not sum to equal the full year total due to changes in the number of shares outstanding during the periods and rounding.

Subsequent events

In the first quarter of fiscal year 2022, the Company closed a follow-on public offering of 5,750,000 shares of common stock at a public offering price of $ 80.30 per share, less the underwriters' discount.

The Company received net proceeds of $ 456.7 million after deducting underwriting discounts and commissions of $ 4.6 million and other offering expenses of $ 0.5 million.

The Company intends to use the net proceeds from the offering for potential acquisitions, repayment of indebtedness, and other general corporate purposes.

On March 8, 2021, the Company acquired 100 % of the outstanding capital stock of Fort Effect Corp, d/b/a Luum for an aggregate purchase price consisting of approximately $ 50.5 million in cash, subject to net working capital and other customary adjustments, and up to $ 20 million in contingent payments payable during the two-year period following the closing of the acquisition.

See Note 7—Commitments and contingencies for subsequent events related to legal matters.

Changes in and disagreements with accountants on accounting and financial disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data